SubPrime Mortgages and Income Documentation
First time homebuyers often wonder what a lender is going to look for when determining whether or not you qualify for a mortgage and how much you qualify for. Lenders have many different ways of classifying your loan scenario according to risk. You could be considered “Full Doc”. “Limited Doc”, “Lite Doc”, “Stated Self-Employed”, “Stated Wage-Earner” or “No Doc”. There are also variations on these documentation levels based upon what assets you can verify for reserves (generally two months of mortgage payments are required; six months if the property is an investment property).
Basics of Income Documentation
Whether you have bad credit, poor credit or other factors that will put you in the “subprime” category, the following basics about income documentation will help you know what your risks are when applying for a mortgage loan. Let’s unravel some of this jargon:
Full Doc - Full Documentation
If you can provide your lender with two years of W-2’s and two or three of your most recent pay stubs if you are a wage-earner, you will be eligible for “full doc” status, which carries the best interest rates and highest loan amounts, along with the most lenient credit requirements. If you are self-employed, your lender may ask for your past two years’ tax returns. Many sub-prime lenders will also accept bank statements to determine your income. They will want to see anywhere from twelve to twenty-four months of consecutive bank statements and will average the deposits to determine your income. If these bank statements are from a personal account, the lender will usually accept 100% of the deposits in calculating your income, and if they are from a business account, it they will typically count 50% - 75% of the gross deposits.
Limited Doc
This type of documentation is similar to Full Doc, except that your lender will probably on ask for your most recent W-2 or twelve months of bank deposits and a current pay stub. If you are self-employed, the lender will probably ask for your most recent tax return or twelve months of personal or business bank statements.
Lite Doc
Again, this is similar to Full Doc and Limited Doc, except that the lender will probably only ask for your past six months’ bank statements or a current pay stub covering at least six months of income history with year-to-date calculation.
Stated Income
With a Stated Doc loan, you are not required to provide the lender with any W-2’s, pay stubs or tax returns. Instead, you simply state your income on your loan application (called a 1003). If you are self-employed, the lender will probably ask for proof that your business exists, which can usually be verified by providing a tax ID number. If you have an employer and are considered to be a wage earner rather than self-employed, your lender will need to verify that you are in fact an employee of the company you state on your application, but will not ask about or verify your income. While your income will not be verified as a stated wage earner, if you list your occupation as a cashier at a fast food restaurant and are claiming to be earning $100,000 a year, you probably won‘t get a loan. Lenders have a variety of complicated software programs that calculate income based on where you live and that is consistent with your profession and level of experience.
Stated Documentation
Stated Doc loans are generally divided into these two categories–Stated Self-Employed and Stated Wage-Earner. Stated Self-Employed loans generally have better rates than Stated Wage-Earner loans because a lender questions why you are not able to provide W-2’s or pay stubs to support what you say you are making. Depending on the profession you are in, this may be your best or only option. Stated Income loans are common for borrowers in the food service industry for example, where a large portion of their income is in the form of cash or tips.
No Doc - No Documentation
No Doc loans are a mortgage broker’s dream. All a broker needs to do is fill out the basic parts of your mortgage application (name, address, social security number, etc.) and have the lender or broker pull your credit report. Do not list income, assets, or even employment on a true no-doc loan. You will need very good to excellent credit in order to qualify for one of these loans, as they are the most risky from a lender’s perspective. Also, don’t expect to obtain 100% financing with No Docs–they will typically require a down payment. There are a few lenders willing to do 100% No Doc financing, but your FICO score will probably have to be at least 720 and lenders’ guidelines have been tightening recently.
More Documentation Equals Better Interest Rates
Mortgage lending is all about risk. Especially if you have credit problems, the more documentation you can provide, the better your interest rate will be. Also, you will probably won‘t have to shell out as much cash for a down payment and your lender will be more lenient about your credit score if you are full doc versus stated doc. Talk to your broker or lender about what you can and can’t provide in terms of documentation. They should be able to steer you towards the best program available to you.
